The Booming U.S. Stock Market … Will It Last?
Gregory Kolb, Perkins Chief Investment Officer, examines how dividends, earnings growth and multiple expansion influenced market performance over the past decade and what those trends might say about future equity returns.
- The extended bull market may lead investors to ask: “Will this last?”
- While we cannot predict the future, we can gain perspective by examining the three main components of the last decade’s returns.
- Given this context, we offer four strategies in the latest Perkins CIO Outlook for investors faced with the prospect of lower returns.
Stein’s Law, a principle from the late Herbert Stein, chairman of the Council of Economic Advisers during the Nixon administration, states, “If something cannot go on forever, it will stop.” Mr. Stein’s words are a good reminder that knowing if and when to act is never easy.1
The idea seems relevant today in another context: the stock market, which has been booming. After realizing an 18% average annualized total return since the low in early March 2009 (i.e., the bottom of the Global Financial Crisis) through the end of April 2019, investors in the U.S. stock market may ask themselves: “Will this last?”
Unfortunately, there is no definitive answer to that question as we cannot predict the future. However, it is helpful to put the current market environment into perspective by examining the three main components of the returns the market has generated over the past decade:
- Dividends – The dividend yield for the S&P 500® Index briefly rose above 3% at the height of the crisis. As the bull market started, however, the yield quickly fell into a range of 2% to 2.5%. Today, it is closer to 2% on a forward-looking basis. Given the average payout ratio of 35% in the Index, dividends are perhaps the most solid building block of an expected forward-looking rate of return.
- Earnings per Share (EPS) Growth – The consensus estimate for EPS for the S&P 500 over the next 12 months has soared from $68 to $177, a rate of 10% per year.2 But while corporate profits – the main driver of EPS – may continue to grow, a number of factors suggest that the rate of growth is likely to slow, perhaps significantly.
- Multiple Expansion – It wouldn’t be a proper bull market without significant multiple expansion, and recent experience does not disappoint in that regard. Seasoned investors recognize that valuation multiples fluctuate, and while there are good reasons for at least a portion of the increase realized during the bull market (e.g., low interest rates), this component could very well become a headwind in the future should anything go awry.
Whether the bull market ends with a bang or a whimper, it will eventually end. Tempting as it may be, this isn’t really a question of timing – the only time frame that matters for most savers is the long term.
Accepting that the future likely holds the prospect of lower returns than the recent past, what is an investor to do? The May 2019 Perkins CIO Outlook outlines four strategies that can help investors maintain discipline and become more defensive in their portfolios.
1Remembering Herb Stein: His Contributions as an Economist – Address by Stanley Fischer https://www.imf.org/en/News/Articles/2015/09/28/04/53/sp010601
2 As of 4/30/2019
S&P 500® Index reflects U.S. large-cap equity performance and represents broad U.S. equity market performance.
Index performance does not reflect the expenses of managing a portfolio as an index is unmanaged and not available for direct investment.
Perkins Investment Management LLC is a subsidiary of Janus Henderson Group plc and serves as the sub-adviser on certain products.